Plugging Up the Holes That Drain Your Profits

07/13/2011

The Rule of 45: Predicting Sales Results From Inquiries

The Rule of 45 is the basic measurement premise from which you can measure the effectiveness of virtually all lead generation programs. It is a steady, reliable rule which simply says that 45% of all inquiries (not just qualified sales leads), will buy from someone. The timeframe for this purchase is usually, but not always within 12 months. The percent that buys in three months is between 10%-15% and the percent that buys in six months is 26%.

If you follow-up 100% of the inquiries, the biggest variable in this formula is the time needed to reach the 45% threshold. Every product has a typical average time frame for the majority of the interested parties to make a decision. For consumer products this could be a few months, for B2B products the Rule of 45 is completed within 12 months.

On average the following rules apply:

Within 3 months 10%-15% of business to business prospects will buy someone's product.

Within 6 months, 26% will buy someone's product.

Within one year 45% will buy someone's product

While time is a pacing item, the most influential issue for a company to attain it's fullest share of the market place is the follow-up by the salesperson. Follow-up only 25% (a consistent number I hear from many companies), and you'll only compete in 25% of the available deals.

How important is this variable? The following example shows what happens when sales follow-up dips to 25%. First, let's look at the potential in a group of 1000 inquiries if follow-up is 100%.

1000 Inquiries X 45%% = 450 potential buyers

X Follow-up of 100% and you still have 450 buyers

X 25% market share = 112 buyers

X ASP (average sales price) of $10,000 = $1,120,000 in sale

Reduce the follow-up to 25% and this is the result:

1000 inquiries, x 45% x 25% Follow-up X 25% X $10,000 = $280,000

Your own market share is projected as a percent of the buyers. I have been involved in over 100 Did You Buy Studies on a variety of products, and the Rule of 45 is consistent.

Pretty brutal isn't it. Spend 2%-20% of yearly revenue on marketing and because of poor follow-up your sales will be 25% of what could have been. This calls for a mandate from sales management: 100% Sales inquiry follow-up is part of every salesperson's job description. At some companies, this is a condition of employment.